2013 (4) TMI 680 - HC - VAT and Sales Tax

Free supply of parts under warranty deemed 'sale' under Karnataka Sales Tax Act

State of Karnataka Versus Cauvery Motors (P) Ltd.

The High Court held that transactions involving free supply of parts under warranty and credit notes for reimbursement constituted a 'sale' under the ... Sales tax on spare parts - Whether no sale involved within the definition in section 2(1)(t) of the Karnataka Sales Tax Act, 1957 - whether the amount received by the assessee for supply of parts to the customers as a part of the warranty agreement was liable to tax? Held that:- In the instant case, customers have purchased the motor vehicles from the manufacturers through the assessee. The sale price includes the price of warranty. The assessee has supplied spare parts, replaced defective parts and returned the defective parts to the manufacturer. Along with the defective parts, the assessee has raised a debit note in the name of the manufacturer. Thereafter the manufacturer has raised a credit note. The manufacturer has paid the assessee the price of the spare parts, which were replaced. If the said spare parts had been purchased in the open market, both of them have to pay sales tax. Therefore, in view of the law laid down in Mohd. Ekram Khan's case [2004 (7) TMI 341 - SUPREME COURT OF INDIA] the consideration paid by the manufacturer to the assessee by way of a credit note represents the sale price of the spare parts which are replaced and is liable to tax. In that view of the matter, the impugned order passed by the Tribunal is liable to be set aside. Hence, Revision is allowed.Order passed by the revisional authority is restored to file in its original. Issues:1. Interpretation of the definition of 'sale' under section 2(1)(t) of the Karnataka Sales Tax Act, 1957.2. Taxability of transactions involving free supply of parts under warranty and credit notes issued for reimbursement.3. Assessment of sales tax on spare parts supplied during the warranty period.4. Imposition of penalty for non-payment of tax post the judgment in Mohd. Ekram Khan's case.Analysis:1. The High Court addressed the issue of whether the transactions involving free supply of parts under warranty and credit notes for reimbursement constituted a 'sale' under section 2(1)(t) of the Karnataka Sales Tax Act. The Tribunal had held that no sale was involved in these transactions. The High Court referred to the judgment in Mohd. Ekram Khan's case, emphasizing that the consideration paid by the manufacturer to the dealer via credit notes represented the sale price of spare parts and was subject to tax. The Court set aside the Tribunal's order, restoring the assessment order passed by the assessing authority.2. The Court analyzed the nature of the transactions where customers purchased vehicles from the dealer, including the cost of warranty in the sale price. The dealer supplied spare parts under warranty, raised debit notes on the manufacturer, and received credit notes in return. Following the precedent set in Mohd. Ekram Khan's case, the Court concluded that the consideration paid by the manufacturer to the dealer for spare parts constituted the sale price, making it taxable. The Court allowed the revision petition, overturning the Tribunal's decision.3. In another matter, the Court considered the levy of sales tax on spare parts supplied during the warranty period. The Additional Commissioner had imposed tax on these spare parts, which the Court found justified post the Mohd. Ekram Khan judgment. However, the Court noted that the Department's understanding previously did not require sales tax on these spare parts. Therefore, the Court quashed the penalty imposed by the Additional Commissioner for non-payment of tax, considering the circumstances. The Court partly allowed the sales tax appeal, upholding the tax and interest but setting aside the penalty.In conclusion, the High Court's judgment clarified the taxability of transactions involving free supply of parts under warranty and credit notes for reimbursement, emphasizing the application of the definition of 'sale' under the Karnataka Sales Tax Act. The Court's decision aligned with the principles established in the Mohd. Ekram Khan case, ensuring consistency in tax treatment and penalty imposition based on evolving legal interpretations.